Chapter 9 - Liabilities

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Accounts payable turnover ratio

A high ratio of this suggests that the company is paying its accounts with suppliers quickly, in a timely manner

Notes payable

A note payable specifies an annual interest rate associated with the borrowing

COGS Expense / Average accounts payable

Account payable turnover ratio

365 days / Accounts Payable Turnover Ratio

Average age of payables

Current Liabilities: Accounts payable Accrued liabilities Notes payable Current portion of long-term debt Noncurrent liabilites: Long-term debt Deferred taxes Bonds

Balance Sheet

Future value * present value factor

Calculating Present value:

75% economic life transferred end asset fair market value present value 90% fair market value

Capital lease criteria: 1) Lease term is ____ or more of the assets´s expected ______ 2) Ownerships of the asset is ____ to the lessee at the ___ of the lease 3) Lease permits lessee to purchase the ____ at a price that is lower than its ______ 4) The _______ of the lease payments is over ___ or more of the _____ of the asset when the lease is signed

Operating Activities (indirect) Net Income + Increases in current liabilities - Decreases in current liabilities Under Financing Activities + Increase in long-term liabilities - Decrease in long-term liabilities

Cash Flow

suppliers/creditors manipulation creditors

Caution with Accounts Payable Turnover Ratio: 1) Might not be generalizable is a company pays some _______ on time but is late with other 2) Subject to _____; managers could be late in paying _____ during the entire year but catch up at year-end so that the ratio is at an acceptable level

pay interest

Company is legally obligated to ______

bankruptcy

Creditors can force the company´s ______

Total current assets / total current liabilities

Current Ratio

income statement

Liabilities are not shown on the _______

debt & equity

Liabilities: Two sources of financing ______ & ______

Dr. Cash (+A) Cr. Note Payable (+L)

Note payable: Journal entry when the note is issued

Dr. Interest Expense (+E,-SE) Cr. Interest Payable (+L)

Note payable: Recodring the adjusting journal entry for the interest owed

Dr. Interest Payable (-L) Cr. Cash (-A)

Note payable: Recodring the interest payment to the lender

interest revenue interest expense

Note payable: To the lender, interest is a(an)______ To the borrower, interest is a(an) _______

Dr. Compensation Expense (+E,-SE) Cr. Cash (-A) Cr. FICA Payable (+L) Cr. Income tax withheld (+L)

Payroll journal entry:

Social Secutiry Tax & Medicare Tax (FICA) Federal Income Tax & State and Local Income Taxes (Taxes) Voluntary Deductions

Payroll taxes: Gross pay Less Deductions: - - - - - = Net pay

Liabilities

Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services

Deferred/Unearned revenue

Revenues that have been collected but not earned

bonds public

Significant debt needs are often filled by issuing _____ to the ____

banks insurance companies pension plans

Small debt needs can be filled by a single source:

Footnotes at the bottom

Summary of significant accounting policies - description of pertinent information concerning accounting treatment of liabilities Liabilities note - a listing of the major classifications of liabilities with information about maturities and interest rates. Information about contingent liabilities

Probable

The Probabilities of occurrence of a contingent liability: _______ - the change that the future event or events will occur is high

Reasonably possible

The Probabilities of occurrence of a contingent liability: _______- the chance that the future event or events will occur is more that remote but less than likely

Remote

The Probabilities of occurrence of a contingent liability: _______- the chance that the future event or events will occur is slight

Current cash equivalent

This is the cash amount a creditor would accept to settle the liability immediately

Current Ratio

This measures a company´s liquidity - the ability of the company to pay its short-term obligations with current assets

Working Capital

This measures a margin of safety that ensures a company can meet in short-term obligations

Present value Future value Interest rate Time period

Time Value of money:

Current assets - Current liabilities

Working Capital

Working capital

_____ impacts the profitability of the company: Managing this: Don´t want too little becasue then you do not have enough current assets to pay off current liabilities Don´t want too much because it is not an efficient use of current assts (they just sit there)

Liabilities

______ are recorded at their current cash equivalent, which is the cash amount a creditor would accept to settle the liability immediately

Creditors

______ often require the borrower to pledge specific assets as security for long-term liabilities

Contingent liabilities

_______ are potential liabilities that are created as a result of a past event

Deferred revenues

________ are reported as a liability because cash has been collected but the related revenue has not been earned by the end of the accounting period

Liquidity

ability to pay current obligation

Accrued Liabilites

another name for accrued expenses

Trade accounts payable

another name for an accounts payable

Deferred revenues

another name for unearned revenues

debt

funds from creditors

equity

funds from owners

Capital lease

long-term lease Meet one of 4 criteria; Record an asset (debit) & a liability (credit) on the Balance Sheet

Current Liability

maturity = 1 year or less

Noncurrent Liability

maturity > 1 year

Unearned revenues

obligations arising when cash is received prior to the related revenue being earned

Notes payable

obligations due supported by a formal written contract

Accrued expenses

obligations related to expenses that have been incurred but have not been paid at the end of the accounting period

Accounts payable

obligations to pay for goods and services used in the basic operating activities of the business

Operating lease

short-term lease No liability or asset is recorded on the Balance Sheet


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